The EU MiFID II and onshored UK MiFID regimes both have share trading obligations (STOs) which mandate investment firms to trade certain shares on regulated markets, multilateral trading facilities, systematic internalisers or third-country trading venues assessed as equivalent by the EU and UK respectively.
ESMA has today published its expectations for the STO in the EU in the event of a no-deal Brexit and in the absence of an equivalence decision in respect of the UK by the European Commission (EC).
The statement from ESMA has made clear that the EU’s STO will apply to all shares traded on EU27 trading venues that are shares of firms incorporated in the EU (EU ISINs), and of companies incorporated in the UK (GB ISINs) where these companies’ shares are ‘liquid’ in the EU. This means EU banks, funds and asset managers will not be able to trade these GB or EU ISIN shares in the UK, even where the UK is the home listing of the British or EU company.
ESMA’s stated goal has been to provide as much certainty as possible and to mitigate potential adverse effects of a trading obligation in these circumstances.
Whilst the FCA acknowledges that clarifying the application of the STO in the event of a no-deal Brexit will help to provide certainty, we believe that only a comprehensive and coordinated approach can provide the necessary certainty to market actors. Without this approach, it will not be possible to address the issues of conflicting obligations applying to the same instruments. Where this is the case, firms may be limited to trading certain shares only in either the UK or the EU or in some cases be caught by overlapping obligations.
The onshoring of EU legislation in preparation for Brexit means that the UK will, as well as the EU, have an STO. Applying the same approach as ESMA to the scope of the UK STO would, based on current trading data, mean there would be a large degree of overlap between the UK and EU obligations.
This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We therefore urge further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets.
The FCA stands ready to engage constructively with ESMA and other European authorities to achieve this.